Richard Green is a professor in the Sol Price School of Public Policy and the Marshall School of Business at the University of Southern California.
This blog will feature commentary on the current state of housing, commercial real estate, mortgage finance, and urban development around the world. It may also at times have ruminations about graduate business education.

Wednesday, December 03, 2008

We need to teach MM better

I was listening this morning to a Morgan Stanley investment banker say that in the early part of the decade, companies' stock prices got hammered if they didn't have enough leverage. Now they get hammered if they don't have sufficient cash to pay off any potential bullet loans.

We try to teach that financing should be irrelevant to business valuation (until the cost of financial distress comes into play). We try to teach that as one takes on more debt, the cost of equity should go up just enough to offset the benefit of debt's lower cost. We just must not teach it sufficiently well.

4 comments:

Uncle Billy, Listener
said...

There was an excellent post on Econ. View regarding quants and financial engineers, their education and work experience. Huge disconnect between what they probably should be learning and what they are asked to do on a daily basis.

On a cheerier note, however, Dudamel has arrived and tomorrow night we're going to listen to him conducting one piece completely foreign to our ears, then Mozart Piano Concerto 23 (great backstory on this piece here: http://www.laphil.com/tickets/program_detail.cfm?id=1772)

Finally a hike through the alps with a grandiose Strauss.

I hope you caught the comment many posts ago in response to the magical sound in the Amsterdam concert hall. They seem to be very aware of the special relationship between the musicians and the hall.